Brother, Can You Spare $700 Billion

As the U.S. Congress debates the George W. Bush administration's proposed massive bailout of the nation's precarious financial system, the astringent analysis of economist Dean Baker has enjoyed a high profile in the news, the opinion pages and the blogosphere.

Baker is co-director of the Centre for Economic and Policy Research (CEPR), "an independent, nonpartisan think tank" in Washington (www.cepr.net). His most recent book is "The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer".

Peter Costantini spoke with Baker by telephone on Sep. 24, 2008. Excerpts from the interview follow.

PC: On TV, Treasury Secretary Hank Paulson comes off as a straight shooter you could sit down and have a beer with. These are qualities we prize in choosing presidents and deciding to go to war. Why shouldn't we just trust him and round up the 700 billion dollars he's asking for to an even trillion?

DB: I don't mean to impugn Paulson's integrity, but the guy was the CEO of Goldman Sachs. The people he's bailing out are his friends, his colleagues. We don't hand anyone a blank cheque, but particularly not someone who comes from his background.

Would we hand a former head of the United Auto Workers Union a hundred billion dollars for a bailout of the auto industry to spend as he thought best, even if we trusted the guy? When we spend public money, we expect accountability, especially when it's such a huge intervention.

PC: Some take the position that this crisis is all scare tactics, that we should let the market wring out the financial industry.

DB: I'm happy to see the financial industry wrung out. Half the banks could go out of business and we'd be fine. But last week the whole system of payments almost collapsed. I don't want to see people unable to pay their bills or withdraw money from an ATM or buy plane tickets with a credit card.

I don't rule that out that it was engineered -- I wouldn't say it's absolutely above these people to do something like that. But you actually did have a situation where banks didn't trust each other to the point that you couldn't conduct normal business.

PC: China holds an enormous quantity of U.S. bonds. Could we pressure them into helping with this bailout because we're "too big to fail"?

DB: China is holding our bonds at extremely low rates of return, which helps the bailout in a huge way. Frankly, I don't know why they do it. For all I know, we've already negotiated this. Given that, we're not in a position to lean on them to give us more money.

We'd actually be better off in some ways if they didn't help us by holding our Treasuries. The dollar would fall, which would increase our exports and reduce our trade deficit -- one of the forces underlying this crisis.

PC: What kind of effects do you see this crisis having on, say, a coffee farmer in Mexico or a factory worker in Vietnam?

DB: First, assuming the government does this right, we'll be preventing a lot of global financial instability, because a meltdown in the U.S. would cause damage just about everywhere.

But the U.S. economy will be heading into a recession, so that's going to reduce demand for exports from all over the world, and the prices for many of these products will contract. It will affect the coffee farmer and anyone who's been selling things to the U.S. or world market.

Now if that's offset by China and some other developing countries continuing to grow rapidly, then maybe the impact won't be that big.

PC: If China and India and Brazil continue to grow, do you see a shift of economic power away from the U.S. towards these economies?

DB: Well, it's certainly part of the story. The U.S. had already been growing much less rapidly than China. They're not about to pass the U.S., but they're certainly gaining very rapidly. For many countries, particularly in East Asia, the Chinese economy is already more much more important the U.S. economy.